BCLP Banking Blog

Bank Bryan Cave


Main Content

FINRA Action Highlights Risks to Broker-Dealers of Allowing Use of Independent RIA’s

A FINRA Hearing Panel issued a decision on March 9, 2015 that will have a potential significant impact on any broker-dealer that allows its registered representatives to have their own investment adviser.  In light of this decision, broker-dealers should assess and evaluate the adequacy of their supervisory systems and procedures relating to supervision of a representative’s outside advisory activities.

In DOE v. Fox Financial Management Corporation (“Fox Financial”), Brian Murphy and James Rooney, the FINRA Hearing Panel found that the firm, its President, and its Chief Compliance Officer failed to adequately supervise a representative (Representative James Rooney, hereafter “JER”).  Specifically, the Respondents failed to adequately supervise JER with respect to his independent registered investment adviser (RIA).  Instead of treating JER’s RIA business as a private securities transaction, the Respondents instead treated JER’s RIA business as an outside business activity.  The Panel imposed principal bars on the supervisors, along with an expulsion of the firm.

FINRA issued Notice To Members (NTM’s) in 1994 and 1996 discussing a firm’s supervisory obligations with respect to a representative’s RIA activities.

In these NTM’s, FINRA indicated that firms were specifically required to assess whether the advisory activities of a representative constituted private securities transactions that were required to be supervised as such and recorded on a firm’s books and records.  FINRA has also issued a series of Interpretive Letters since the NTM’s were released, reiterating that firms were required to assess whether outside RIA activities needed to be treated as private securities transactions.

With respect to the specific facts of the case, the Panel found JER joined Fox Financial in May 2008, and was with the firm until October 2012.  Immediately after joining Fox Financial, the firm had JER complete the firm’s “Outside Activity Approval” form.  Beyond that, however, the firm did not take any steps to supervise JER’s RIA business.  Specifically, the Panel found Respondents’ supervision deficient in the following respects:

  • The firm did not review any customer suitability information for investors;
  • The firm failed to obtain duplicate account information, confirmations and statements from the executing broker-dealer;
  • The Respondents did not take any action to ensure that JER’s actions complied with regulatory requirements; and
  • The firm failed to record the RIA’s transactions on the firm’s books and records.
Read More

Financial Services Update

Financial Services Update

August 27, 2010

Authored by: Matt Jessee

Bernanke Promises More Fed Action on Economy

On Friday, Fed Chairman Ben Bernanke said that the Federal Open Market Committee, the Fed panel that Bernanke leads and which sets interest rates, could make additional purchases of longer-term securities in order to prevent deflation. In regards to the overall state of the economy, Bernanke said “the pre-conditions for a pickup of growth in 2011 appear to remain in place, as banks increase lending, worries over the European sovereign debt-crisis abate and consumers increase their savings.”

SEC Votes to Give Shareholders “Proxy Access”

On Wednesday, the SEC Commissioners voted along party lines 3-2 to give shareholders what is commonly known as “proxy access,” which requires companies to include the names of all board nominees, even those not backed by the company, directly on the standard corporate ballots distributed before shareholder annual meetings. To win the right to nominate, an investor or group of investors must own at least 3% of a company’s stock and have held the shares for a minimum of three years.

Currently, shareholders who want to oust board members must pay for mailing separate ballots, as well as wage a separate campaign to win shareholder support. The new rule will be in place in time for the 2011 annual meeting season next spring.

However, the final rule did address concerns from the business community. Smaller companies will be exempt from complying with the rule for three years. Investors will be prevented from borrowing stock to meet the 3% threshold and will be restricted to nominating directors for no more than a quarter of a company’s board.

Read More

Financial Services Update – Issue 10

Senate Financial Regulatory Reform Bill
On Monday, Senate Banking Committee Chairman Chris Dodd (D-CT) introduced his latest draft financial regulatory reform bill. The bill creates a new consumer protection agency, which will be located within the Federal Reserve, with regulatory authority over financial products such as mortgages and credit cards. The legislation also creates a resolution authority framework to liquidate failed financial firms, imposes stricter capital and leverage requirements on banks, creates a systemic risk council, requires shareholders be allowed a non-binding vote on executive compensation, and imposes new rules and standards for credit rating agencies. The bill also alters the banking regulatory structure by giving the FDIC regulatory oversight of state banks with assets below $50 billion, giving the OCC authority over national banks and federal thrifts with assets below $50 billion, eliminates the Office of Thrift Savings, and gives the Federal Reserve authority over national banks and thrift holding companies with assets of over $50 billion. Finally, the bill contains language regarding the regulation of over-the-counter “OTC” derivatives that is identical to Dodd’s November draft bill, but Dodd has indicated his desire to replace those provisions with language currently being negotiated between Senator Jack Reed (D-RI) and Senator Judd Gregg (R-NH). Sources indicate Reed and Gregg may be unable to reach an agreement on such language, and with the markup scheduled to begin next Monday and hundreds of amendments expected to be filed, it remains to be seen how Dodd will handle these provisions.

Dodd and Bernanke Exchange Criticism Over Proposed New Fed Role
On Wednesday, Federal Reserve Bank Chairman Ben Bernanke and former Fed Chairman Paul Volcker testified before the House Financial Services Committee at a hearing examining the central bank’s regulatory duties. During his testimony and under questioning by Committee members, Bernanke criticized Senate Banking Chairman Dodd’s draft regulatory reform bill for its provisions which remove the Fed’s supervisory role over small banks, saying it will deprive the central bank of key information it uses to execute monetary policy. On Thursday, Dodd’s staff countered Bernanke’s criticism by citing former Fed Vice Chair Alice Rivlin’s statement from a July 2009 Senate Banking Committee hearing in which she stated, “I don’t think that supervising individual banks is important to making monetary policy. I know that was said around the table when I was at the Fed, but I didn’t really experience that we learned a lot from supervising particular banking institutions that was useful to monetary policy.”

Read More
The attorneys of Bryan Cave Leighton Paisner make this site available to you only for the educational purposes of imparting general information and a general understanding of the law. This site does not offer specific legal advice. Your use of this site does not create an attorney-client relationship between you and Bryan Cave LLP or any of its attorneys. Do not use this site as a substitute for specific legal advice from a licensed attorney. Much of the information on this site is based upon preliminary discussions in the absence of definitive advice or policy statements and therefore may change as soon as more definitive advice is available. Please review our full disclaimer.